Banking

Investment banking drop weighs on J.P. Morgan results

Despite beating estimates, unit's revenue fall hurts sentiment

By

CynthiaLin

NEW YORK (MarketWatch) -- Shares of J.P. Morgan Chase & Co. slid Thursday as the bank's better-than-expected second-quarter earnings were eclipsed by concerns over slimmer profits from its investment banking business.

While the bank
JPM, +0.98%
reported 76% profit rise from a year ago, its shares late Thursday were down nearly 1%. The stock is up about 10% in the past 12 months, but down 4% this year.

Earnings for the quarter came in at $4.8 billion, or $1.09 cents a share, compared to $2.7 billion, or 28 cents in the same period last year.

Excluding the reserve release and a $550 million charge to cover the U.K. tax on banker bonuses, J.P. Morgan earned 87 cents a share in the latest quarter.

Analysts polled by FactSet Research had, on average, been expecting earnings of 74 cents a share. Net revenue on a managed basis fell 8% to $25.61 billion. Analysts had expected the group to report revenue of $25.81 billion.

Following the earnings announcement, Standard & Poor's Equity Research maintained its strong buy rating on J.P. Morgan, and analyst Matthew Albrecht raised his 2010 earnings estimate by 71 cents to $3.71 a share.

Investment banking slips

Net income for the investment banking business, however, fell 6% to $1.4 billion, reflecting a sharp drop in fees and higher noninterest expenses.

Chief Executive Jamie Dimon said in a conference call Thursday morning that the investment banking pipeline is "doing fine," but he was uncertain about the second-half outlook for the unit.

"Your guess is as good as ours," he said in response to a question, adding that there was "a lot of activity in the corporate world."

J.P. Morgan ranked second among bookrunners in global equity offerings for the quarter, but collected the most fees for its services during the first half of the year, according to Dealogic, an independent research firm. The bank also came in second in debt underwriting for the quarter.

In the three months, the bank was hired to underwrite key deals such as Essar Energy's (ESSR) $1.9 billion initial public offering in the U.K. and Synovus Financial Corp.'s
SNV, +1.42%
$806 million follow-on.

Trading revenue totaled $4.6 billion in the period, with fixed income transactions generating $1.9 billion less and equity trades $400 million less than the prior quarter.

Credit metrics improve

J.P. Morgan said total provisions for credit losses declined 65% year-on-year on a managed basis, to $3.36 billion from $9.7 billion.

Consumer provisions totaled $3.9 billion for the quarter, down from $8.5 billion a year ago. Provisions were down 55% in retail financial services and 52% in the group's card services division.

"This quarter the shoe seems on the other foot -- great credit but weaker pre-provision," Goldman Sachs analysts said in a note after the results. "Perhaps most importantly, housing double dip mortgage and home equity losses [were] down 35% [from the first quarter]."

But Dimon sounded a wary note on the housing market.

"We're extremely cautious on mortgages -- there are a lot of factors at play here," he said, citing foreclosures and home prices in particular.

Growing capital base

The bank's tier 1 ratio, a measure of its capital cushion, improved to 12.1% at the end of June from 11.5% at the end of March.

Anticipating stricter liquidity requirements in the imminent bank-overhaul bill, banks have been bolstering the amount of capital held on their balance sheets. J.P. Morgan was one of several big Wall Street banks that received government funds during the financial crisis, but repaid taxpayers ahead of its major rivals.

Given the company's increasing capital base, management said it plans on buying back more stock at prices that will benefit existing shareholders. The bank repurchased $500 million in stock in the quarter, its first time since the fourth quarter of 2007.

The repurchase "pace will depend on where the price is," Dimon said on a call. "If the stock goes down, we can buy back a lot more, if the stock goes up, we may not buy back any."

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